U.S. Housing Gloom Deepens

Purchases of new homes fell to an annual rate of 795,000 in August, as the credit squeeze and rising inventories took their toll on the housing market.

 

WASHINGTON (By Barrie McKenna)  October 4, 2007 — Sales of new homes in the United States sank to their lowest level in nearly a decade last month - an ominous sign that the worst is still ahead for housing and the rest of the economy.

The 8.3-per-cent annualized drop in August was worse than analysts had predicted, contributing to a sense of gloom about the U.S. economy.

The news helped send the dollar again tumbling against the loonie and other key currencies. The Canadian dollar closed yesterday at 99.86 cents (U.S.), up from Wednesday's 99.58, after hitting a high of $1.0019 in earlier trading.

The apparent trigger was a report from the U.S. Commerce Department that showed that sales of new homes fell to an annual rate of 795,000 - the lowest level since December, 1997. The median sales price was $225,700 last month, down 7.5 per cent from a year ago.

There is now an eight-month supply of newly built homes - twice the backlog there was when the market was booming.

And few experts expect a turnaround any time soon. The housing slump will last beyond next year, dragging down home prices and increasing credit losses, according to Daniel Mudd, chief executive officer of mortgage lender Fannie Mae.

"We don't think [we'll] hit a bottom until the end of '08 and then [we'll] have some period of time to work our way back up again," Mr. Mudd told Bloomberg News.

He predicted home prices will fall 2 to 4 per cent this year, and "more next year."

The pessimism suggests that while last week's interest rate cut by the U.S. Federal Reserve Board may have calmed financial markets, it isn't likely to be an instant fix for the real estate market.

The grim state of the housing market was underscored by KB Home, the fifth-largest U.S. home builder, which yesterday reported a larger-than-expected loss in the three months ended Aug. 31.

"We see no signs that the housing market is stabilizing and believe it will be some time before a recovery begins," KB CEO Jeffrey Mezger said in a statement.

Mr. Mezger said a recent spike in foreclosures is creating a glut of unsold homes and driving down prices.

KB, the latest home builder to report red ink, lost $35.6-million, a sharp reversal from a $153.2-million profit in the same quarter last year. The loss from continuing operations, which excluded the sale of its French unit, was even larger at $478.6-million, partly a result of a writeoff of some of its real estate.

Economists warned that tumbling sales and rising inventories of unsold homes mean that housing will continue to hurt the economy for months to come. It means fewer jobs in construction and fewer purchases of all the big-ticket items that homeowners typically buy in the months after moving in.

Nomura Securities chief economist David Resler said the "drag" from housing would "deepen and extend" into next year.

"As long as demand continues to slide, builders will continue to scale back building plans," Mr. Resler said.

The full impact of the credit crunch hadn't even hit the mortgage market in August, suggesting further declines in the months ahead, said economist Ian Shepherdson of High Frequency Economics.

"People don't like borrowing to buy depreciating assets, and lenders don't like to lend on them either," he said. "Housing is nowhere near bottom [and] neither is the impact."

The market continues to be very uneven and volatile across the United States. Sales actually rose sharply in the Northeast and Midwest, reversing declines in July.

But it wasn't enough to overcome a sharp falloff in the South (down 14.7 per cent) and the West (down 20.8 per cent).

Also yesterday, the Commerce Department issued its final tally of U.S. gross domestic product for the second quarter - 3.8-per-cent annual growth versus a previous estimate of 4 per cent. But the GDP figures are historical and predate this summer's onset of a credit crunch and financial turmoil. The economy has slowed considerably since then.

NORTHEAST

$344,600

Q2 2006

$319,400

Q2 2007

5 7%

MIDWEST

$203,100

Q2 2006

$197,200

Q2 2007

5 3%

SOUTH

$206,700

Q2 2006

$205,400

Q2 2007

5 1%

WEST

$329,800

Q2 2006

$348,700

Q2 2007

1 6%

NEW HOME SALES

5 8.3%

from August

5 21.2%

from a year ago

RESALE HOME SALES

5 4.3%

from August

5 12.8%

from a year ago

MEDIAN PRICES

5 8.3%

from August

5 7.5%

from a year ago